Policy Uncertainty Makes Firms Reluctant to Hire: New Evidence

I have been arguing that economic policy–in particular policy unpredictability or uncertainty–has been a factor in the slow recovery.  That’s the main theme of the book I edited with Lee Ohanian and Ian Wright. A chapter by Scott Baker, Nick Bloom, and Steve Davis in that book discusses a measure of policy uncertainty that supports this view empirically.

Further support now comes from two San Francisco Fed economists, Sylvain Leduc and Zheng Liu, who have uncovered a relationship between firms’ reluctance to hire workers and the level of policy uncertainty.  In their paper Uncertainty and the Slow Labor Market Recovery, they present “evidence that heightened uncertainty about economic policy during the recovery made businesses more reluctant to hire workers.”

The following chart from the paper shows that their measure of recruiting intensity has been low while the measure of policy uncertainty has been high.  Moreover, the relationship between vacancies and unemployment has shifted (this is the Beverage curve shifter) in the direction of higher unemployment.

SF Fed uncertainty

The magnitude of the effect is significant: They find that the unemployment rate is about 1.3 percentage points higher because of policy uncertainty.

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